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Here is a look at how Apartment Investment & Management Company (NYSE:AIV) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - FAIL
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$0.00 ** See conclusion.
MG OpinionOvervalued
Value Based on 3% Growth$0.00
Value Based on 0% Growth$0.00
Market Implied Growth Rate-28.04%
Net Current Asset Value (NCAV)-$36.84
PEmg-47.57
Current Ratio0.48
PB Ratio4.29

Balance Sheet - 9/30/2013

Current Assets$231,100,000
Current Liabilities$484,900,000
Total Debt$4,829,500,000
Total Assets$6,489,500,000
Intangible Assets$0
Total Liabilities$5,607,400,000
Outstanding Shares145,920,000

Earnings Per Share

2013 (estimate)$1.11
2012-$0.95
2011-$1.57
2010-$1.73
2009-$1.75
2008-$1.51
2007-$1.14
2006-$1.29
2005-$1.23
2004-$0.36
2003-$0.25

Earnings Per Share - ModernGraham

2013 (estimate)-$0.54
2012-$1.42
2011-$1.61
2010-$1.58
2009-$1.47
2008-$1.25

Conclusion:

Apartment Investment & Management Co. fares extremely poorly in the ModernGraham valuation model. First, it does not pass the requirements of either the Defensive Investor or the Enterprising Investor. This is a result of the high level of debt relative to its current assets, but more than that, it is a result of the terrible earnings figures put out by the company. Earnings drive everything for businesses, even REITs. Free cash flow is nice, but everything still comes down to earnings. If a company does not earn money, it will not have cash to eventually trickle back to investors. Investors seeking to use a value investing approach as is used by ModernGraham would do better by looking at some companies that pass the requirements set forth by Benjamin Graham. As for a valuation, the company's consistently negative earnings lead to the valuation model returning a figure of $0. If there is value here, it would be found through the balance sheet, but the high debt eliminates that as a possibility.

Disclaimer: The author did not hold a position in Apartment Investment & Management Co. (AIV) at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Apartment Investment & Management Co.